User 378502

"Leaked" stress test results show 16 of the nation's top 19 banks are already technically insolvent - any two of which could take down the FDIC. Update: Treasury says it doesn't even have the results yet, which Karl Denninger calls a lie. Zero Hedge, and others, question the veracity of the leak and its source's agenda.

A history book in 2075 writes about the financial depression of 2008 as follows:

"Things didn't get much worse until the results of the stress tests were released in the month of April, 2009. The following crash in equity and other asset markets collapsed the economy in a span of 3 months. The then prevailing Democratic government, unable to stanch the down fall in equity and asset prices declared a bank holiday lasting for fifteen days."

Last week, a former investigator of the S&L scandal told Bill Moyers Journal that CEOs of many of America's largest banks knowingly engaged in the fraud which has now brought the economy to the brink of catastrophe. Some say the government's failure so far to investigate any wrongdoing "is a much larger scandal that the bonuses being paid by AIG or anybody else."

I watched - for 10 mins. Switched it off.

Bond Expert: Wednesday Outlook

your monastery didn't have CNBC?


On Apr 08 08:48 AM Tony Petroski wrote:

> "renewed concerns about the economy have weighed on sentiment in
> global equity markets."
>
> What? Did I miss something. I just returned from two years in the
> monastery. What happened?

Fed's Kevin Warsh on the Upside of Panic

Excellent thoughts from Kevin Warsh. Thoughtful and analytical.

After reading about the risks involved in depositing money at the financial intermediaries I have this suggestion (which, btw, goes against the grain of my political philosophy): FDIC anyway insures banks and retail deposits upto $200,000.

Why won't the government set-up some kind of US Govt. banks where the insurance becomes a mere formality.

Rest of the financial intermediaries continue to exist but retail depositors have the choice to deposit their money at the US Govt Bank or with any other. The latter (commercial banks) can choose to do whatever they want (breaking down Glass Stegall restrictions) and the retail depositor stands to gain or suffer its consequences as well.

Remember - FDIC anyway insures the deposits at all banking institutions.

The only way to prevent another AIG (AIG), professor Tyler Cowen writes in a NY Times op-ed, is to make sure counterparties do a better job of vetting their trading partners. And the only way that's going to happen is if creditors feel the pain too. Barry Ritholtz agrees, mostly.

Prof. Cowen is making it complicated.

The right way to eke out information is to force banks to issue subordinated debt (just one level above equity in the bankruptcy hierarchy) every year based on the increase in assets or 10% of average annual assets. The yield of that debt would make it clear to every counter party about the nature of assets added on to the firm's books.

If Prof. Cowen's thoughts are implemented then it is quite likely that counter party firms might refuse to deal with firms that have the hint of a clawback arrangement. That would render private transactions subject to some form of standardized punishments, which all private parties might not want.

Thursday Outlook: Commodities, Global Markets

Too many charts, too less persuasive and too few conclusions.

Why India Isn't Safe from the Global Recession

So your argument is that the domestic credit is drying up and foreign investments are winding down so growth will slow down.

Often overlooked is an important indicator in the Indian context: monsoon rains.

India's rural economy is so heavily dependent on agriculture and monsoon rains, irrespective of whether banks lend or not, is going to drive the growth rates. Lending might influence the growth rates by showing positive gains in the infrastructure and telecom sectors but the decisive influence is that of the agricultural sector.

Watch out how Hindustan Lever's stock performs. They are a much better indicator of India's growth prospects than anything published by any authority. HLL is the only consumer firm that has sunk itself deep to the eyeball in the rural Indian market.

The new public-private toxic asset program has at least one fan: Pimco. Bill Gross says the bond fund will participate in the plan, adding "this is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically."

Why wouldn't he? If I am funded and my losses are covered, I would even bet on human constipation to clear up.

My dear Bill Gross - I know its definitely a win for you. Remember this: someone HAS to take a loss. Most likely the tax payer. Somewhat likely the banks. Leas likely the investor: that's you!

Geithner's Doomed Bailout Plan

Geithner's plan is to subsidize private investors by providing them with funds from the Treasury and from FDIC. Then the private investors go and bid for non performing loans held by the various banks. I see two flaws why this simply won't work.

1. Private investors will bid let's say 45 cents for every dollar face value of the non-performing loans. The banks contend that it is actually worth at least 60 cents - if not more - based on their models and valuation. The wrangling ensues and the banks refuse to put their loans for sale. No loans and no sale.

2. Banks that hold these non-performing loans know that private investors stand to gain if they were sold these assets at their asking prices. They wonder why they can't hold it themselves till they find a profitable deal. Banks now ask the FASB accounting board that the mark-to-market rules be changed and that they are now holding these loans till maturity.

So, Geithner's plan is likely to fail because price discovery process will not be complete as banks won't budge; instead they will ask for change in accounting rules on how they treat these non-performing loans.

Incidentally, the new terminology is "Legacy Assets". Orwell's Politics of The English Language comes to my mind. I guess Obama & Co. wants to deem them as Bush-era legacy assets. I think the true description should be "Constipated Assets".

Why AIG Wasn't Allowed to Fail

CDS are private contracts. Congress cannot act on its whims and fancies abrogating private contracts.

On Mar 17 05:01 PM Mike Hydes wrote:

> What would happen if Congress just invalidated these credit default
> swaps?
>
> If they can do that then why has it not been done?